Kim Hin reported a core net loss of RM6.5m in 1Q19, mainly due to lower revenue across all geographical segments of which the group operates, coupled with higher per unit cost of production and higher administration expenses. Given the weaker-than-expected results, we widen our 2019E losses by 23%, and cut our 2020-21E earnings by 1-2%. Maintain our SELL call with an unchanged TP of RM1.10, based on 2020E Price/book of 0.35x.

Core Net Loss of RM6.5m

Kim Hin posted a core net loss of RM6.5m in 1Q19 compared to our previous and consensus full-year 2019E core net loss of RM16.1m and RM16m, respectively. Revenue was lower by 15% yoy to RM83.8m on the back of lower revenue across all geographical segments of which the group operates; Malaysia (-8% yoy), China (-40% yoy), Australia (-15% yoy) and Vietnam (-7% yoy). Notably, 1Q is seasonally a weak quarter due to festive holidays, hence, we expect losses to narrow in the subsequent quarters.

Thinning Margin

For 1Q19, operating costs fell 13% yoy on the back of lower selling & distribution expenses (-8% yoy), which was partially offset by higher administration expenses (+8% yoy). However, as the decline in operating costs is slower compared to its revenue, the group reported loss before interest, tax and depreciation of RM0.2m, compared to EBITDA of RM2m in 1Q18. We believe per unit production costs was higher yoy in 1Q19 partly due to higher energy costs.

Maintain SELL With An Unchanged TP of RM1.10

We widen our 2019E losses by 23%, and cut our 2020-21E earnings 1-2% accounting for lower-than-expected 1Q19 results. We reiterate our SELL call with an unchanged TP of RM1.10 as we roll forward our valuation basis to 2020E with the same Price/book of 0.35x. We believe the sector outlook remains challenging given the prolonged weak property market and stiff price competition arising from the influx of cheap tiles from neighbouring countries. Having said that, we believe its net cash of RM16m or RM0.11/share will support the company to weather the current industry downturn.

Source: Affin Hwang Research - 28 May 2019